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Rethinking Retirement Income

Rethinking Retirement Income

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Susan Dziubinski: Hi, I'm Susan Dziubinski with What are the implications of this market for retirees? Joining me today to discuss that is Christine Benz. Christine is Morningstar's director of personal finance. Christine, thank you for joining us today.

Christine Benz: Susan. It's great to be here.

Dziubinski: Now Christine, you and our colleague Jeff Ptak recently interviewed retirement researcher Wade Pfau for your Long View podcast, and he had some sobering conclusions for some of the research he's been doing.

Benz: He did. And granted, we talked to Wade back in March, I believe, or maybe early April. Anyway, things were feeling even more uncertain than they are today. But he was less bothered by what we were seeing in the equity market and more concerned from a retirement planning standpoint about the prospect of ultra low yields and the implications for retiree plans. That's really what he pointed to as being a potential key sticking point for retiree plans going forward, if they just sort of accept the conventional wisdom about how to approach plans.

Dziubinski: Let's unpack that a little bit. So then what are the implications for retirees in this very low-yield, or no-yield, environment?

Benz: Well, the starting point, because bond and cash yields are so low is that he believes, and I think it's good advice, that retirees ought to take a look at their withdrawal rates, or if they're pre-retirees embarking on retirement, to really think hard about the 4% guideline, or rule, that's very much in play in retirement planning circles. He believes that that number is too high, that new retirees ought to think about trying to subsist on a lower number. He thinks 3% may be better. In fact, he coauthored a research paper a few years back with our colleague David Blanchett that made a big splash, arguing just that. That because of low yields, because they're likely to stick around for a while, that new retirees should think about a lower starting withdrawal rate. Alternatively, we discussed some variable withdrawal rate strategies, which are also a possibility. In fact, some of the retirement research points to those being better than sort of taking out, say, 3% in year one of retirement and then inflation-adjusting that dollar amount from there. So there's a lot of research that's been done in that space about variable withdrawal rates. Some of those strategies might be effective in such an environment as well.

Dziubinski: And so what did he have to say about those investors who are already in retirement? So not just entering retirement, but have been in it for a while. What are the implications for them? What should they be thinking about?

Benz: I think they have have reason to feel a little better. And the reason is is that they have successfully avoided the big worry that retirement researchers think about, which is what's called sequence of return risk. And that basically means that you encounter a lousy string of returns early on in your retirement that has a potential to permanently impair the portfolio so that it never quite recovers. The good news for people who have been retired for many years is that they've successfully circumvented sequence of return risk. They've made it through if they've been retired for 10 or 15 years or whatever it is. And so they have less to worry about from the standpoint of market returns, potentially not being so good over the next decade. They should still take a look at their withdrawal rate, make sure that it looks sustainable, but they're probably in better shape than new retirees or people who expect to retire within the next couple of years.

Dziubinski: Christine, another topic that came up in your conversation with Dr. Pfau is this idea of buffer assets. Can you unpack that concept for us? Let us know what they are?

Benz: Yeah. I love this idea. The basic idea is that you have some assets in your plan that you could draw upon if your portfolio drops. And so a really simple example, one that I talk about in relation to the bucket strategy is just having cash on hand to tide you through a low yield period or a period in which equities are down. That's one example, a very simple example of a buffer asset. He mentioned a couple of others that I think are worthy of consideration. One would be cash value of a life insurance policy for people who are retired and still have a whole life insurance policy. They may be able to tap that cash in a crunch. He also talked about standby reverse mortgages. So you might be able to tap the equity in your home through one of those reverse mortgages if your portfolio is down and you don't want to invade the assets during a period when equities are down and perhaps when bond yields aren't supporting your cash flow needs.

Dziubinski: And Christine, you've also written about plenty of other strategies that retirees might be thinking about in this low-yield environment. Let's talk a little bit about some of those.

Benz: Talking to Wade really got me thinking about some of the knock-on effects from low yields in relation to other aspects of retiree plans. So one thing to think about is the role of social security, the date at which you might file for social security. As people who are even casually interested in retirement planning know, you do pick up a little bit of an extra benefit from delaying social security past your full retirement age. And so it's worthwhile to take a look at that, because that is sort of a guaranteed bump up in your eventual benefit. When you're looking at guaranteed returns on other safe parts of your portfolio, that return enhancement, if you might call it that, looks even better. So if you haven't yet filed for social security, maybe thinking about that.

Also looking at mortgage paydown. I think that people who are getting close to retirement who have even very low interest rate on their mortgages might look at that, especially if they have safe assets in their portfolios that are earning next to nothing. Paying down that mortgage may in fact be a better use of funds. So I think it's important to look at your plan in totality, not just focus on the portfolio piece.

Dziubinski: Christine, thank you so much for your thoughtful commentary today on rethinking retirement income. We appreciate it.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski for Thank you for tuning in.

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About the Authors

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Susan Dziubinski

Investment Specialist
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Susan Dziubinski is an investment specialist with more than 30 years of experience at Morningstar covering stocks, funds, and portfolios. She previously managed the company's newsletter and books businesses and led the team that created content for Morningstar's Investing Classroom. She has also edited Morningstar FundInvestor and managed the launch of the Morningstar Rating for stocks. Since 2013, Dziubinski has been delivering Morningstar's long-term perspective and research to investors on

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